Fondazione Eni Enrico Mattei

Partial Privatization and Firm Performance

Nandini Gupta

NOTA DI LAVORO 110.2002

DECEMBER 2002 PRIV – Privatisation, Regulation, Antitrust

Nandini Gupta, William Davidson Institute at University of Michigan Business School

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The opinions expressed in this paper do not necessarily reflect the position of Fondazione Eni Enrico Mattei

Partial Privatization and Firm Performance Summary Most privatization programs begin with a period of partial privatization in which only non-controlling shares of firms are sold on the stock market. Since management control is not transferred to private owners it is widely contended that partial privatization has little impact on firm behavior. This perspective ignores the role that the stock market can play in monitoring and rewarding managerial performance even when the government remains the controlling owner. Using data on the population of Indian state-owned enterprises we find that partial privatization has a positive and highly significant impact on firm sales, profits, and labor productivity. The author is grateful to the Administrative Sta .College of India for providing some of the data used in this analysis. He would like to thank Pierre Azoulay, Serdar Dinc, Rick Harbaugh, Klara Sabirianova, Jan Svejnar, and Scott Wallsten. This paper has also benefited from the comments of participants at the WDI Conference on Indian Economic Reforms in 2001, the 2002 Annual Transition Economics Conference, the 2002 AIB Annual Meeting, the FEEM Conference on Privatization, Corporate Governance, and Financial Markets 2002, and seminar participants at the University of Michigan. All remaining errors are the author’s. Address for correspondence: Nandini Gupta The William Davidson Institute University of Michigan Business School 724 East University Avenue Sam Wyly Hall Ann Arbor, MI 48109 USA Phone: (734) 615-4563 Fax: (734) 763-5850 E-mail: nandinig@umich.edu

Introduction

Widespread privatization in recent decades has generated a large empirical literature on the

effect of ownership on firm performance. Most studies find that privatization has a positive

impact on the profitability and efficiency of firms (see Megginson and Netter, 2001, for a recent

survey). The firms in these studies have had a majority of their assets privatized and control

rights have been transferred from the government to private owners. Surprisingly little is

known about the effect of partial privatization where the government remains the controlling

owner. This paper seeks to address this gap in the literature by investigating whether the

performance of state-owned enterprises in India is affected by the sale of non-controlling equity

stakes on the stock market.

Understanding the impact of partial privatization is important because most privatization

transactions of significant size are through partial sales of equity in the stock market. In a

sample of share-issue privatizations from 59 countries, Jones, Megginson, Nash, and Netter

(1999) found that just 11.5% of the firms sold all of their capital and less than 30% sold

more than half of their capital in the initial public offering. India’s privatization program has

followed a similar pattern of partial privatization through share offerings but at a particularly

slow rate. In the ten years following the adoption of the privatization policy in 1991 the

government has sold an average of 16% of equity in 42 firms for total revenues of $4 billion

compared to an estimated $1 trillion raised through privatizations worldwide.

In addition to its practical importance, partial privatization is of theoretical interest because

of the insight it offers into the long-standing debate over why state-owned firms perform poorly.

The political view argues that governments pursue objectives in addition to and in conflict

with profit maximization and that this political interference can distort the objectives and

constraints faced by managers (Shleifer and Vishny, 1994). The managerial view, based on

agency theory, is that state-owned firms have difficulty monitoring managers because there is

neither an individual owner with strong incentives to monitor managers nor a public share price

to provide information on manager actions as judged by stock market participants (Laffont

and Tirole, 1993). Without information from the stock market, managerial incentive contracts

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are restricted (Holmstrom and Tirole, 1993), managers lack an important public signal of

their skills for the executive job market (Fama, 1980), and takeover opportunities are limited

(Scharfstein, 1988 and Stein, 1988).

Full privatization makes it difficult to distinguish between the political and managerial

perspectives because both ownership and control shift to the private sector at the same time.

In contrast, under partial privatization the shares of the firm are traded on the stock market

while the firm remains under government control and subject to political interference. Thus

we are able to test the managerial perspective that inadequate information on managers is an

important factor in the inefficiency of state-owned firms. India’s experience is useful in this

regard because it has a well-established stock market that long pre-dates privatization, and in

the period we consider privatization consisted solely of the sale of minority equity stakes.

Because of its intermediary position between public and private ownership, partial priva-

tization also offers insight into the more general question of whether financial markets can

alleviate agency problems due to the separation of ownership and control. This literature

considers the role of financial markets as information producers and monitors of management

(see for example Grossman, 1976, Grossman and Stiglitz, 1980, Fama, 1980, Diamond and

Verrechia, 1982, Holmstrom and Tirole, 1993, and Dow and Garton, 1997). Stock markets

provide incentives to investors to gather information that is reflected in the share price, and

this information can improve managerial incentives in a number of ways. Holmstrom and Tirole

(1993) show that the share price, which contains unique information that may not be retrieved

from accounting data, can be used to design more effective incentive schemes to improve per-

formance. An observable share price can also have a beneficial impact on incentives because it

serves as a signal of ability in the managerial labor market (Fama, 1980). Moreover, financial

markets facilitate corporate control through takeovers, which can impose managerial discipline

(Scharfstein, 1988, and Stein, 1988). However, public listings may also have an adverse impact

on firm performance in private firms if there is a substantial agency cost associated with the

increased dilution of ownership. In most studies of private firms it is difficult to distinguish

between these confounding effects and the literature has often found evidence of a decline in

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operating performance after going public (Degeorge and Zeckhauser, 1993 and Jain and Kini,

1994).

Studies of partial privatization can investigate the information effect on performance while

minimizing the confounding dilution effect of going public. Unlike private firms, state-owned

firms are not starting from a position where the owner has strong incentives to maximize

efficiency. As a result there is no reason to assume that dilution of state ownership will increase

agency costs. Partial privatization can also control for other factors that could confound

the information effect such as firms undertaking “window dressing” prior to going public, or

choosing to issue stock during a time of abnormally good performance (Ritter, 1991). While

most studies of private firms cannot control for these effects because they only observe post-

listing performance, state-owned firms are subject to stricter reporting requirements and report

financial data even if they are not publicly traded.

Our data consists of accounting information on the population of non-financial firms owned

by the federal (central) government of India, as well as some manufacturing and non-financial

service sector firms owned by regional governments. We observe the pre- and post-privatization

performance of all the firms privatized by the central government up to 1998. In all of these

firms non-controlling shares were sold to financial institutions, foreign institutional investors,

and the public through open auctions, public offerings, and global depository receipts in do-

mestic and international stock markets. Since shares of these firms were traded as soon as the

government sold equity we can test the managerial perspective of inefficiency in state-owned

enterprises.

Our empirical strategy is to investigate whether the operating performance of firms will

depend on the share of equity sold once we control for other factors that can also affect manager

incentives and may be changing at the same time. We use several approaches to address

the potential endogeneity of privatization. First, to minimize the possibility of simultaneity

between privatization and performance we investigate the impact of the lagged share of private

ownership on current performance. This also allows us to take into account that the effect

of managers’ actions due to privatization are likely to appear with a lag. We estimate a

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firm fixed effects specification that will address selection bias that may arise if, for example,

more profitable or larger firms are selected for privatization. The specifications include firm-

specific controls and year dummies to control for contemporaneous macroeconomic shocks.

We then relax the assumption of strict exogeneity in the fixed effects model and estimate

the dynamic GMM model developed by Arellano and Bond (1991) in which we instrument

the privatization variable using instruments from within the panel. This method allows us

to control for persistence in the performance measures and to investigate the effect of partial

sales on the growth rates of these measures. We also control for potential dynamic selection

bias using the method suggested by Frydman et al. (1999) in which the control group is

restricted to firms that are likely to share similar unobserved and time-varying characteristics

as the partially privatized enterprises. We find no change in the sign or significance of the

reported results. We also find no evidence that firms are chosen for privatization because of

unusually bad performance in the previous year, as we would then be overestimating the effect

of privatization (Ashenfelter, 1978). Nor do we find evidence that the results are driven by a

few profitable companies since the results do not change if we exclude the oil and gas companies

which are considered the most profitable of all the state-owned firms. Finally, we find that the

impact of partial privatization remains positive and statistically significant when we control

for changes in competitive conditions.

The results suggest that both the level and the growth rates of profitability and labor

productivity improve significantly with partial privatization. In the firm fixed effects regression

we find that a 10 percentage point decrease in government ownership increases annual (log) sales

and profit by 20% and 13% respectively, and the average product of labor and returns to labor

by 5% and 6% respectively. These results are consistent with the prediction of the Holmstrom

and Tirole (1993) model that firm performance will depend on the volume of equity sold. In

their model the information contained in the stock price and hence its impact on manager

incentives will improve with the liquidity of the stock. Estimating the Arellano and Bond

(1991) model we find that profitability and productivity growth rates increase significantly

in response to a decrease in government ownership. Since we do not find a corresponding

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decline in employment the results support the hypothesis that partial privatization addresses

the managerial rather than the political source of inefficiency due to government ownership.

Our results also offer insight into the debate on the relative importance of competition

versus ownership for productive efficiency. Some argue that competition can shape managerial

incentives better because it reduces the market share of inefficient firms and facilitates perfor-

mance comparisons (Hart, 1983 and Vickers and Yarrow, 1991). On the other hand Shleifer

and Vishny (1994, 1997) have argued that so long as politicians are in control public sector

firms will be characterized by political interference. India’s privatization program was part of

a broader set of economic reforms launched in 1991 that included two competition-enhancing

policies that were of significance for state-owned firms: “dereservation”, which eliminated re-

strictions on entry into certain sectors that had been the exclusive domain of government

firms; and “liberalization”, which eliminated restrictions on foreign equity investment. The

added advantage of observing these policy changes is that we can avoid using endogeneous

market concentration ratios. Our results suggest that privatization and competition are not

substitutes in their impact on firm performance. Moreover the effect of partial privatization

remains similar and statistically significant when we control for changes in the competitive

environment.

In the next section we briefly describe the main characteristics of India’s economic reforms

and its state-owned enterprises. Sections 3 and 4 describe the data, results, and potential

problems with the estimation strategy that we address. We conclude and discuss extensions

in Section 5.

II. Background of the Indian privatization program

In response to a foreign exchange crisis in 1991, India undertook sweeping economic reforms

that included deregulation and privatization. Since the Industrial Policy Resolution of 1991,

which outlined the economic reforms, nearly every government’s annual budget has declared

that their privatization goal is to reduce government ownership to 26 per cent of equity in all

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non-strategic firms.1 However until 1998 the federal government had sold an average of just

16 per cent of equity in 36 of 258 firms and majority stakes in none.2 Euphemistically referred

to as “disinvestment”, privatization has proven to be very difficult to implement. In the ten

years following the launch of the privatization program the government sold minority shares

through a variety of methods including auctions and public offerings in domestic markets, and

through global depository receipts in international markets.3

We are particularly interested in the role of an observable stock price in affecting perfor-

mance. With the exception of 2 firms, all the partially privatized firms are listed on the stock

market and their shares have been traded since the month they were privatized. The remaining

firms are owned by regional governments but the results do not change if these are excluded

from the sample. We wish to note that none of the partially privatized firms were traded prior

to privatization, and none of the firms that have not been partially privatized are publicly

traded. Examining the current ownership structure of partially privatized firms, we find that

privatized equity is mostly distributed between financial institutions, foreign institutional in-

vestors, and the public. From stock market records it also appears that even when shares were

sold to financial institutions, trading in these shares commenced almost immediately on the

domestic stock markets. It is worth noting that India has the world’s third largest investor

base with over 20 million shareholders investing in about 10,000 listed companies.

Large-scale government ownership of firms in India was originally justified by concerns

that the private sector would not undertake projects requiring large investments with long

gestation periods. Starting in the late 1960s there was a period of rapid nationalization of

firms in all sectors, so that by the mid-seventies the public sector accounted for one-fifth of

GDP and two-thirds of the total fixed capital invested in the economy (Goyal, 1999). The

Indian public sector consists of departmental enterprises that are run directly by government

1Strategic firms are those in the defense, atomic energy, and railway sectors. 26% is the minimum amountof equity necessary for certain voting powers.

2Our data ends in 1998 and we observe all the firms partially privatized by the federal government untilthat year and 2 firms partially privatized by regional governments. Between 2000 and 2002 an additional 16firms were approved for sale with transfer of management control.

3A controversial event of the disinvestment process was the purchase of equity in state-owned companies byother state-owned companies in 1999. Our data ends in 1998 hence we do not include these transactions in theanalysis.

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ministries, such as the railways, the postal service, telecommunications, irrigation, and power,

and enterprises that have separate boards of directors. Firms owned by the central government

account for nearly 85 per cent of the total assets of all state-owned companies. These firms

are also large employers accounting for 10 per cent of the total workforce in the organized

sector.4 Over half the enterprises owned by the federal government are loss-making and the

majority of these companies perform far worse in comparison to private firms in the same

industry. The economic burden of the state sector is considerable since these enterprises

account for approximately 25 per cent of GDP and 43 per cent of the total capital stock in

India. Quoting from government sources, privatization will “... release huge amounts of scarce

public resources locked up in these enterprises for deployment in areas that are much higher

on the social priority...”(Department of Disinvestment, 2001).

Prior to 1991 India had an elaborate regulatory framework popularly known as the “License

Raj” that involved restrictions on who could invest, how much, in what, and where. Deregula-

tion started in the mid-seventies but it was not until 1991 that most of these restrictions were

removed. The most significant deregulatory measures affecting state-owned firms, dereserva-

tion and liberalization, were implemented in this year. Dereservation reduced the number of

sectors reserved for the public sector from seventeen to four. Only arms and ammunition,

atomic energy production, mining of minerals related to atomic energy, and railway trans-

portation remain closed to the private sector.5 Since 1991 there have been a number of joint

ventures between public sector companies in dereserved sectors and private companies such as

the collaborations between Indian Oil Company and Mobil, IBP and Caltex Petroleum, and

Balmer & Lawrie Freight Containers and Tectrans of Germany to name a few. Liberalization

allowed for automatic approval of foreign equity up to 74 per cent in certain sectors.6 Exam-

4The total workforce in the organized sector (registered companies) was estimated at 27 million in 1997 with20 million employed by governments and government-owned enterprises (Department of Disinvestment, 2001).

5The sectors reserved for the public sector that were opened to private participation are: Iron and Steel;Heavy Castings and Forgings of Iron and Steel; Heavy Plant and Machinery for Iron and Steel; Hydraulicand Steam Turbines; Coal and Lignite; Mineral Oils; Mining of Iron Ore, Manganese, Chrome, Gypsum,Sulphur, Gold and Diamonds, Copper, Lead, Zin, Tin, Molybdnum, Wolfram; Aircrafts; Air Transportation;Ship Building; Telephones and Telephone Cables; Telegraphs and Wireless Apparatus; and, the Generation andDistribution of Electricity.

6At the 2-digit SIC level the industries that were liberalized are: Food; Cotton and other Textiles; Textile

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ples of foreign companies that entered Indian markets in response to the liberalization policy

are Cogentrix, AES Transpower, Rolls Royce, Powergen, British Telecom, AT&T, Deutsche

Telekom, and Nippon Telegraph.

Changes in the rules governing the competitive environment occured at around the same

time that firms were being partially privatized and could also have an effect on manager

incentives (see for example Hart, 1983 and Vickers and Yarrow, 1991). We will include these

two exogenous policy changes in the estimations to identify the effect of partial sales on firm

performance and to investigate the relative importance of competition versus ownership.

III. Data

We observe the privatization status, industry, share of government ownership, and a range

of accounting data for 341 manufacturing and service sector firms owned by the central and

state governments of India. This includes 249 firms that form the population of non-financial

companies owned by the central government, and 92 firms that are owned by various state

governments. The firm level data was collected by the Centre for Monitoring the Indian

Economy (CMIE) from company balance sheets and income statements.7

From the full sample we observe current sales for an unbalanced panel of 2470 firm years

between 1990 and 1998. Excluding observations with missing information on lagged assets and

government loans the largest available sample is 1958 firm years from 1991-1998. This data

also includes 284 firm years of observations for firms owned by regional governments. In order

to avoid exacerbating attrition we use an unbalanced panel.

We obtained data on privatization transactions from the Government of India, the World

Bank Privatization Transactions Database, and from news sources. The information includes

the fraction of equity sold by a firm, the year of sale, and the method of sale. The World Bank

Products; Basic Chemicals except Petroleum and Coal; Rubber, Plastic, Petroleum and Coal Products; MetalProducts; Machinery and Equipment; Transport Equipment; Mining Services; Basic metals; Medical Equipment;Construction; and Land and Water Transportation services. We use two and three digit SIC codes to identifyliberalized and dereserved sectors. Government approval is still required in the following industries: coal andlignite; petroleum; alcohol; sugar; tobacco products; defense and aerospace equipment; hazardous chemicals;and drugs and pharmaceutical products.

7Data from the same source was used recently by Bertrand, Mehta, and Mullainathan (2002).

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data confirms that the firms sold stock either through public offerings on the domestic stock

exchanges and/or through global depository receipts. There were no strategic asset sales to

another company or individual between 1991 and 1998.

Since firms are not required to report employment in their income statements we obtain

annual data on the number of workers from the Annual Public Enterprise Survey published by

the government. However this data is not available for regional state-owned firms.

Our data has a number of advantages over other studies that consider the effects of pri-

vatization. We observe the population of non-financial public firms owned by the central

government of India so sample selection is not an issue. Detailed ownership information lets

us investigate the effect of variations in ownership shares (for example Frydman et al., 1999,

only observe whether a firm has been privatized). Another advantage of this analysis, which is

an issue of concern in the existing literature, is that the accounting standards remain the same

in our data after partial privatization because the firms are still owned by the government and

are subject to the same reporting requirements.

Table 1 reports the incidence of privatization and the average fraction sold in each year

between 1991 and 1998.8 The largest number of privatizations occurred in 1992, a year after

the reforms were announced, when an average of 12% of shares of 26 firms was offered on the

stock market. Table 1 also reports the distribution of firms in dereserved sectors and liberalized

sectors. Below we describe the principal variables used in this paper.

We investigate the effect of partial privatization on the following categories of firm per-

formance: profitability; labor productivity; and employment. Following the literature, we use

the annual values of (log) sales and (log) accounting profit as measures of profitability. Sales

have also been used as a measure of productivity in other studies. Profit is measured as the

income before tax from the main activity of the firm and does not include payments made by

the government or government-owned development institutions to the firm. Our two measures

of productivity are the (log) average product of labor (ratio of net sales to employment) and

returns to labor (ratio of operating income to labor). The first variable is a standard mea-

8Since we investigate the impact of lagged ownership on performance we do not look at the effect of the salethat took place in 1998 because we lack data for 1999.

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sure of labor productivity in the literature while the second variable is used by LaPorta and

Lopez-di-Silanes (1999) among others. Finally, we also observe (log) annual employment as a

dependent variable. The construction of the variables are described further in the Appendix.

The explanatory variable we focus on is PRIVit, which measures the percent of equity of firm

i that is privately owned in year t.9 Firm-specific controls include lagged performance, lagged

(log) annual assets to control for firm size, and competition policy changes. Following Bartel

and Harrison (2001) we control for potential changes in political interference by the govern-

ment by including as an explanatory variable the share of government financing (loans and

subsidies) in total borrowing.

IV. Results

From the summary statistics presented in Table 2 it appears that partially privatized firms

have higher sales, profit, labor, average product of labor, assets, and returns to labor than

firms that remain under full state ownership. Table 3 presents before-after statistics of selected

performance measures for the partially privatized firms. Some of these firms sold shares in more

than one tranche so we define the pre and post measures as average values of the variables for

the years before and after the first tranche. We find that firms experience a significant increase

in annual sales and profits after partial privatization. Our results are similar to LaPorta and

Lopez-di-Silanes’ (1999) finding of a 24.1% increase in the average profits of Mexican firms after

privatization. We note that there is also a significant decline in borrowing from government

sources after partial privatization.

The before-after estimator is not reliable if there are changes in the overall state of the

economy between these years or if there are changes in the life-cycle position of some of these

privatized firms. Below we describe the results of a fixed effects regression with year dummies.

9We will investigate the effect of lagged PRIV on current performance to avoid potential simultaneityproblems.

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A. Estimating the effect of partial private ownership

We investigate the average impact of privatization by comparing privatized firms to firms

that do not sell any equity through 1991-1998 by estimating the following firm fixed effects

specification:

yit = αi + αt + PRIVit−1β +Xitδ + εit, (1)

where yit is the performance measure, the Xit variables are firm-specific factors that explain

the outcomes, and αt is a year effect captured by dummy variables for each year.

The specification in (1) includes a firm-specific fixed effect, αi, which reflects fixed dif-

ferences across firms that are constant but unobserved over time, year dummies that would

capture contemporaneous correlation, and a random unobserved component εit that reflects

unobserved shocks affecting the performance of firms.

The results from estimating equation (1) are presented in Table 4. We find that the share

of equity that is private in the previous year has a positive and statistically significant impact

on all the profitability and labor productivity measures. For example in column 1 we see that a

10 percentage point increase in the level of private equity would increase annual sales by 20%.

The results also suggest that partial privatization does not cause the government to abandon

the political objective of maintaining surplus employment. Reducing the level of government

ownership has no effect on employment and borrowing from the government appears to have a

negative impact on profitability. The latter result could be interpreted as evidence of political

interference, however it could also be the case that financial support is directed to poorly

performing firms.

Next we relax some of the assumptions of the fixed effects model. First, following Frydman

et al. (1999) we account for persistence in the performance variables by including a lagged

dependent variable in the specification.10 We use the dynamic GMM model developed by

Arellano and Bond (1991), henceforth known as AB, and difference equation (1) to remove the

10We improve on their estimation strategy by accounting for endogeneity of the lagged dependent variablein a fixed effects specification.

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fixed effect αi, and use lagged levels of the dependent and predetermined variables and differ-

ences of the strictly exogenous variables as instruments.11 Second, we treat PRIVit−1 and the

lagged share of government loans in total borrowing as predetermined variables and instrument

them as well. For these instruments to be valid it should be the case that once we include

the predetermined variables in the regression further lags of these variables do not explain

performance growth.12 Since we have a relatively short panel we restrict the instrument set to

a maximum of 3 lags of the dependent and predetermined variables.13

This approach will also minimize the potential for endogeneity of the privatization variable

because it is far less likely that the decision to sell or how much to sell in a given year is based

on anticipated changes in performance in the future. However, the main disadvantage has to

do with the use of potentially weak instruments that may not be highly correlated with the

predetermined variables. In Table 5 we report the results from estimating the following AB

specification:

∆yit = αt +∆PRIVit−1β +∆yit−1γ +∆Xitδ +∆εit, (2)

which describes the effect of a change in the level of private equity on the growth rates of

the performance variables. The results suggest that a change in the share of private equity

has a positive and statistically significant impact on the future growth rates of sales, profit,

average product, and on the change in returns to labor. There is no impact on employment

growth. Consider the average firm in the sample that sells 0.4% equity between t − 2 andt − 1. Based on the results in Table 5 if this firm were to instead sell 1.4% it would increase

the next period growth rate of sales by 1.7 percentage points, profit by 3.8 percentage points,

11The model relies on the sequential exogeneity assumption that, conditional on the firm fixed effect, εit isnot correlated with current and past values of the right hand side variables but may be correlated with futurerealizations of xit.

12 It is reasonable to question this assumption in the case of PRIVi,t−1, since partial privatization in theperiods prior to t−1 should also have an impact on current performance. Note however that PRIV in any yearwill measure the cumulative amount of equity sold upto and including that year. We still test the assumptionby including both ∆PRIVi,t−2 and ∆PRIVi,t−1 in a fixed effects specification in differences. The coefficient of∆PRIVi,t−2 is not significant for any of the dependent variables. The same result was obtained for the laggedshare of government loans in total borrowing.

13 Including all the available lags as instruments does not significantly change the magnitude or statisticalsignificance of the coefficients.

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and average productivity by 1.1 percentage points (columns 1-3).14 We report the p-values

from the Sargan test of overidentifying restrictions and note that we cannot reject the null

hypothesis that the instruments are valid (p-values are between 0.28 and 0.81). The tests for

second order autocorrelation in the differenced residuals also support the assumption of the

AB model that the residuals in the levels equation are serially uncorrelated.

From Holmstrom and Tirole (1993) we know that the informativeness of the stock price

signal will depend on the liquidity of the stock. The testable prediction of their model is that

performance should depend on the volume of equity sold because managers can be monitored

more effectively with better information. The results appear to support this hypothesis since

we find that performance will improve more the greater the share of equity sold. It would be

interesting to see however if the results capture the firm’s response to being listed on the stock

market, which does not vary with the volume of equity sold. To test if the share of equity sold

will matter once we control for the listing effect, we introduce the dummy variables below that

capture the impact of the first and second listing on performance:

FIRSTis =

1∀s ≥ t if firm i first sells equity in year t

0 otherwise

SECONDjs0 =

1∀s0 ≥ t if firm j again sells equity in year t

0 otherwise

To save space we only report the coefficients of the listing and equity share variables in Table 6

since the control variables are the same as used in equation (1). We observe in column 1 that

the initial listing has a positive and significant impact on sales and the coefficient of PRIV

is also positive and significant, but when we control for a subsequent listing the coefficient

of the fraction of equity sold is no longer significant. In contrast the coefficient of PRIV is

positive and highly significant for profit, average product, and returns to labor when we include

SECOND. Thus we find evidence of a listing effect on nearly all the performance measures

14We lose at least one year of observations due to first differencing and the use of lagged variables as instru-ments. However we replicated the fixed effects results with this smaller sample without major changes.

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but the results also suggest that this effect will be stronger the higher the share of equity

sold.15 None of the estimated coefficients are significant for employment and we do not report

these results. We also entered the (differences of) initial and subsequent listings as additional

predetermined variables in the AB specification in equation (2). The coefficient of the first

difference of PRIV remains positive and significant for all the performance measures. The

listing effects are significant for the profitability variables but not for productivity growth.16

Since none of the firms transferred management control, the principal change introduced

by partial privatization is the impact on managers’ incentives of the information contained

in an observable share price. State-owned enterprise shares are closely monitored by the

large number of business analysts and institutional and individual investors in India’s stock

markets. Market monitoring can affect manager incentives in a number of ways, although in

this case we can probably rule out the disciplinary impact of a market for corporate control

(Scharfstein, 1988) since it does not exist for state-owned firms. Stock performance is a valuable

signal in the market for managerial skills and it may also be used by workers and lower level

managers to monitor senior managers since all workers’ outside opportunities depend on the

performance of the firm (Fama, 1980). This argument is bolstered by the fact that in the decade

following economic liberalization there has been a rapid growth in executive compensation in

the private sector. Stock prices may also be used by the government to monitor managers more

effectively.17 For example if the government is interested in raising more revenues from future

equity sales it may explicitly or implicitly pressure managers to maintain share value.18 Better

information and monitoring might also reduce corrupt practices by managers, like redirecting

15Note that PRIV is the interaction between FIRST and the share of private equity in the firm.16These results are available on request.17Compensation contracts for managers of state-owned enterprises could provide evidence of improved mon-

itoring by the government. But the government does not release this data, also contracts would not capture jobmarket signaling or implicit pressures from within the firm.

18This does not imply that the government no longer pursues political objectives. The main criticism ofthe government owner is that it has other objectives in addition to profit maximization. Stock prices allowthe government to better monitor manager actions that improve profit performance, but this does not rule outpolitical objectives being pursued as well. The results too suggest this since employment does not fall andthe effect of partial privatization is significant when we control for government payments to firms. Moreover,it is unclear why objectives would change selectively for the partially privatized firms. A revenue maximizinggovernment would emphasize profit maximization in all the firms since they are all future sale candidates.

14

output to non-paying customers (LaPorta and Lopez-di-Silanes, 1999). Thus improvement in

incentives may come about through a combination of the above channels.

It could be that managers respond to other factors that also affect incentives but are not

related to better information, such as a bankruptcy threat. We controlled for a potential change

in budget constraints by including financial support from the government as an explanatory

variable. However, Indian state-owned enterprises are rarely if ever shut down and there is no

anecdotal evidence to suggest that partially privatized firms are subject to a greater bankruptcy

threat. Another potential explanation is that managers respond to the threat of losing their

jobs after privatization if profits decline, and not to the share price. It seems unlikely however

that managers concerned about their future with the firm would not care about maintaining

or improving share performance. Moreover, this explanation does not provide an unambiguous

prediction because managers may also understate profits to discourage potential buyers as was

true in many instances of insider privatization in Eastern Europe and Russia. However, a

plausible alternative explanation for performance improvement is that manager incentives are

affected by a change in competitive conditions rather than partial privatization.

B. Controlling for changes in the competitive environment

We ask if partial privatization will continue to matter once we control for changes in the com-

petitive environment of firms. We introduce two variables to capture the effects of dereservation

and liberalization: DEREST will equal one if the firm is in an industry that was reserved

for state-owned firms and zero if it is an industry that was never reserved. LIBT will equal

one if the firm is in an industry that removed restrictions on foreign entry and zero if it is

an industry that retained barriers. Both are interacted with a time trend. An advantage of

these exogenous policy changes is that they measure potential rather than actual entry and

therefore are less likely to suffer from the endogeneity problems associated with measures of

market concentration. In Table 7 we report the coefficients of PRIV , DEREST, and LIBT

for the fixed effects and AB estimations. The control variables are the same as in specifications

(1) and (2) and we do not report them to save space.

15

From the fixed effects results in the top half of Table 7 we see that the coefficient of the share

of private equity remains positive and statistically significant at the 1 per cent level for all the

performance measures. Dereservation appears to increase sales and profit but the coefficient

is not significant for the productivity measures.19 In contrast, from the negative coefficient of

the liberalization dummy it appears that sales decline in response to foreign entry. The results

also suggest that competitive pressures will force firms to undertake some labor restructuring

although there does not appear to be a corresponding effect on labor productivity. The AB

specification is reported in the lower half of Table 7 and we find that the coefficient of ∆PRIV

is positive and significant for all the performance measures (except employment). However

competition does not appear to have much effect on the growth rates of the performance

measures.

Clearly the effect of partial privatization on firm performance cannot be attributed to

changes in the competitive environment alone. Contrary to Vickers and Yarrow (1991) the

evidence suggests that competitive pressures may not be sufficient to fully address productive

inefficiency. Instead the effects of competition and privatization may be complementary, so that

reducing government ownership is necessary to improve productive efficiency while competitive

pressures increase the allocative efficiency of firms.

C. Addressing problems in the estimation strategy

The fixed effects estimation will control for the sort of selection bias that may arise if more

shares of better firms are likely to be sold. We also address potential selection bias by using

lagged privatization and instrumental variables. Below we describe the results from additional

robustness checks.

We investigate whether the results overestimate the impact of privatization because priva-

tized firms experience a decline in performance prior to privatization that other firms do not,

a phenomenon often referred to as “Ashenfelter’s dip” (Ashenfelter, 1978). Following Bartel

and Harrison (2001) we compare the pre-privatization performance measures with those of

19We do not observe firms belonging to the sectors that are still reserved for the government (defense, atomicenergy, and railways).

16

firms that did not change ownership and find that privatized firms do not perform differently

compared to the control group prior to privatization.

Fixed effects will not address the dynamic selection bias that may arise if the government

selects firms for privatization based on time-varying characteristics that are unobservable to

the researcher. Frydman et al.(1999) argue that firms that are selected for privatization are

likely to share similar characteristics so comparing privatized firms to a control group of firms

that have also been selected for privatization but have not yet been sold should address this

potential selection bias. Since privatization is distributed over several years in our data, in

any given year we also observe firms privatized in later years that form the control group. The

control group will also include all the firms that have been sold between 1998 (the last year

of our sample) and 2001. From the results of the fixed effects regression reported in Table 8

we see that the coefficient of the PRIV variable is positive and highly statistically significant

for all the performance measures. The positive effect on employment is surprising and may

suggest that higher profits cause the firms to hire or retain more workers relative to firms that

are yet to sell equity. We do not report results from estimating the AB model to save space

since they are similar to Table 5.

The partial privatization process in India also causes us to believe that dynamic selection

is not a major problem. The debate in policy circles and in the media emphasizes the ab-

sence of a privatization plan. A comment from an editorial in the prominent Indian business

newspaper The Economic Times (May 2001) reflected this general perception: “The disin-

vestment programme of the government is completely incoherent and lacks transparency and

conviction.”

The results do not change if we exclude the most profitable enterprises, the oil and gas

companies that have the highest forecasted profitability among the partially privatized com-

panies. For example in column 1 of Table 4 we find that the coefficient (standard error) of

PRIV is .029(.004) and significant at the 1 per cent level, and it retains its sign, magnitude

and significance for the other specifications as well. Similarly, we also find that the results are

not driven by the firms owned by regional governments.

17

V. Summary and concluding comments

Most governments undertake the transfer of state-owned enterprises to the private sector

through partial sales, but this method is largely dismissed as ineffectual in policy debates and

its effects have been overlooked in the literature. Using fixed effects and instrumental variable

regressions we find that partial privatization in which minority shares of state-owned firms

become available on stock markets has a positive and highly statistically significant impact on

the operating performance of firms.

Previous studies have shown that full privatization improves firm performance but offer

little insight into how. Does privatization improve performance simply by eliminating political

interference that forces managers to employ surplus labor and pursue other inefficient policies?

Or does it also improve performance by reducing agency problems that impede management

efficiency? Because partially privatized firms remain under government control it is unlikely

that the performance gains in our data occur through the former mechanism. Consistent with

this interpretation we find that partial privatization leads to an increase in the productivity of

labor and output without layoffs. Hence, our results support the managerial view that improved

management efficiency is a significant factor in why privatization improves performance.

The principal-agent literature shows how stock price information can alleviate agency prob-

lems through a number of different channels. Our data cannot identify the particular channels

that are important in improving the performance of Indian state-owned enterprises. Since a

large private sector coexists with the public sector in India and managers can move between

the sectors, we speculate that one important role of stock markets is providing the market for

executives with public information on how state-owned firms are performing. Detailed case

studies may provide more insight into the role of this and other mechanisms.

18

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21

Appendix: Description of Variables used in Tables 2-8

Variable Description SALES

Annual sales generated by an enterprise from its main business activity measured by charges to customers for goods supplied and services rendered. Excludes income from activities not related to main business, such as dividends, interest, and rents in the case of industrial firms, as well as non-recurring income.

PROFIT

Annual excess of income over all expenditures except tax, depreciation, interest payments, rent, and extra-ordinary expenditures. Does not include extra-ordinary income and income from sources not related to main business activity.

LABOR

Total number of employees in a year including managerial staff.

ASSETS

Annual gross fixed assets which include movable and immovable assets as well as assets which are in the process of being installed.

AVERAGE PRODUCT OF LABOR

Ratio of sales over total employment.

GOVERNMENT LOANS AND SUBSIDIES

Sum of annual loans received from the central and state governments and government-owned development institutions, and subsidies given by the government.

TOTAL BORROWING

Total borrowings including loans from banks, institutions, debentures, other companies, tax deferrals, foreign and other borrowings.

GOVT LOAN/ TOT BORR

Ratio of government loans and subsidies to total borrowings.

RETURNS TO LABOR

Ratio of operating income to total employment. Operating income is measured as sales minus the total cost of raw materials, wages and energy costs.

DEREST

Dummy variable that is equal to one if the firm is in an industry that was reserved for government-owned firms until 1991, interacted with a time trend.

LIBT

Dummy variable that is equal to one if the firm is in an industry that removed restrictions on foreign ownership after 1991, interacted with a time trend.

PRIV

Variable that lies between 0 and 100 measuring the per cent of equity that is private in a firm in a given year.

FIRST

Dummy variable equal to one if firm has sold equity in just one tranche, either in that year or prior to that year.

SECOND

Dummy variable equal to one if firm has sold equity in at least two tranches, either in that year or prior to that year.

YEAR

Year dummies excluding 1991.

Table 1 Partial Privatization by Year

This table reports the frequency of partial privatization between 1991 and 1998 among firms owned by the Government of India. The data is from the World Bank Privatization Database and Government of India sources and includes all privatization transactions that occurred in this period. 36 central government firms were partially privatized between 1991 and 1998 of which some are sold in several tranches. The sample also includes 2 regional government-owned firms. Standard deviations are in parentheses.

YEAR

NUMBER OF FIRMS SOLD

AVERAGE % OF EQUITY SOLD

MAXIMUM

FRACTION OF EQUITY SOLD

MINIMUM

FRACTION OF EQUITY SOLD

1991

3

17.24

(19.53)

38.84

.12

1992

26

11.77 (7.60)

20.10

1.23

1993

16

3.65

(3.66)

10.08

.06

1994

9

3.24

(6.08)

17.60

.01

1995

18

7.06

(7.69)

23.10

.01

1996

9

2.24

(2.86)

9.25

.03

1997

3

15.90 (9.06)

26.00

8.50

1998

1

17.00 (0.00)

17.00

17.00

DISTRIBUTION OF DERESERVED FIRMS AND LIBERALIZED FIRMS (NUMBER OF FIRM YEARS) Dereserved Not reserved Liberalized

160

278

Not- liberalized

475

1045

Table 2 Summary Statistics by Ownership Category

This table reports annual summary statistics for the population of Indian state-owned enterprises, all firms partially privatized between 1991 and 1998, and all firms that did not sell equity over this period. Units equal millions of US$. Sales is revenues received from main activity; profit is excess of income over all costs except tax, depreciation and interest; employees are the actual number of workers; assets are gross fixed assets; average product of labor is the ratio of sales to employment; returns to labor is the ratio of operating income to employment where operating income is sales net of input costs; government loans are the sum of the total amount of loans and subsidies from the government and government-owned development institutions and total borrowing is the sum of loans from all sources. N refers to firm years for each variable and ownership category. Standard deviations are reported in parentheses

ALL FIRMS

PARTIALLY PRIVATIZED

FIRMS

UNSOLD STATE-OWNED FIRMS

SALES

828.32

(3316.56) N=1958

3907.14

(8132.71) N=234

410.42

(1444.68) N=1724

PROFIT

391.43

(501.88) N=1952

861.51

(1093.99) N=233

327.71

(300.66) N=1719

EMPLOYEES

9612.93

(23637.57) N=1507

19775.88

(33825.63) N=212

7949.18

(21071.61) N=1295

ASSETS

745.54

(2892.85) N=1958

2650.03

(6135.19) N=234

487.04

(1963.56) N=1724

AVERAGE PRODUCT OF LABOR

.134

(.302) N=1507

.328

(.490) N=212

.082

(.162) N=1295

RETURNS TO LABOR

.046

(.144) N=1507

.143

(.289) N=212

.030

(.094) N=1295

GOVT LOAN / TOTAL BORROWING

.297

(.359) N=1958

.141 (.223) N=234

.318

(.369) N=1724

Table 3 Comparing Performance Before and After Partial Privatization

This table reports before-after summary statistics for all partially privatized firms between 1991 and 1998. Average values are computed for before and after the first tranche of privatization for each firm. All variables (except government loans over total borrowing) are measured in logarithms. Sales is measured as revenues received from main activity; profit is excess of income over all costs except tax, depreciation, and interest; employees are the actual number of workers; assets are gross fixed assets; average product of labor is the ratio of sales to employment; returns to labor is the ratio of operating income to employment where operating income is sales net of input costs; government loans are the sum of the total amount of loans and subsidies from the government and government-owned development institutions, and total borrowing is the sum of loans from all sources. Standard deviations of means are in parentheses.

VARIABLE

AVERAGE BEFORE

PRIVATIZATION

AVERAGE AFTER PRIVATIZATION

AFTER-BEFORE

t-statistic of difference in means

REVENUES

SALES

6.293 (.193)

6.883 (.120)

2.173**

PROFIT

6.131 (.080)

6.357 (.050)

2.007**

PRODUCTIVITY

AVERAGE PRODUCT OF LABOR

.206

(.042)

.229

(.019)

.500

ASSETS

GROSS FIXED ASSETS

6.250 (.231)

6.161 (.157)

-.255

FINANCING

GOVERNMENT LOANS AND SUBSIDIES

2.771 (.317)

2.898 (.149)

.367

TOTAL BORROWING

4.775 (.311)

5.351 (.154)

1.630*

GOVT LOAN / TOT BORR

.194

(.035)

.136

(.014)

-1.700*

Notes: * Significant at the 10 per cent level, ** Significant at the 5 per cent level, *** Significant at the 1 per cent level.

Table 4 The Impact of Private Ownership on Firm Performance

Comparing Partially Privatized Firms to Fully State-Owned Firms (Fixed Effects) This table reports results from firm level fixed effects (within) regressions to estimate the impact of private ownership using partially privatized firms as the treatment group and the population of firms that did not sell equity as the control group for the period 1991-1998. All the firm-specific variables are measured in logarithms except PRIV, returns to labor, and the share of government loans in total borrowing. The right hand side firm-specific variables are lagged one year. PRIV is the % of private equity; sales is measured as revenues received from main activity; profit is excess of income over all costs except tax, depreciation, and interest; employees are the actual number of workers; assets are gross fixed assets; average product of labor is the ratio of sales to employment; returns to labor is the ratio of operating income to employment where operating income is sales net of input costs; government loans are the sum of the total amount of loans and subsidies from the government and government-owned development institutions; and total borrowing is the sum of loans from all sources. Number of observations refers to firm years for each variable and ownership category. Standard errors are in parentheses.

SALESt

PROFITt

AVERAGE PRODUCTt

RETURNS TO

LABORt

LABORt

PRIVi,t-1

.020***

(.004)

.013***

(.002)

.005***

(.000)

.006*** (.000)

.001

(.002) GOVT LOAN /TOT BORRi,t-1

-.119* (.067)

-.058* (.034)

.008 (.010)

.022**

(.009)

.036

(.042) ASSETS i,t-1

.016

(.011)

-.004

(.006)

.002 (.002)

.003**

(.001)

.001

(.007) YEAR DUMMIES

Yes

Yes

Yes

Yes

Yes Number of observations

1958

1952

1506

1506

1522

R2

.0413

.0506

.1054

.1339

.1087

Pr>F(k, NT-k) a

Pr>F b

.000***

.000***

.000***

.000***

.000***

.000***

.000***

.000***

.853

.000***

Notes: a: Joint significance test for all coefficients, b: Joint significance test for firm fixed effects, F statistic distributed with (N, NT-N-k-1) degrees of freedom, where N equals number of firms, T equals number of years, and k is the number of RHS variables. * Significant at the 10 per cent level, ** Significant at the 5 per cent level, *** Significant at the 1 per cent level.

Table 5 The Impact of Private Ownership on Firm Performance

Comparing Partially Privatized Firms to Fully State-Owned Firms (GMM)

This table reports results from the Arellano and Bond (1991) GMM regressions to estimate the impact of private ownership with partially privatized firms as the treatment group and the population of state-owned firms that did not sell any equity as the control group for 1991-1998. All firm-specific variables are measured in logarithms except PRIV, returns to labor, and the share of government loans in total borrowing. The right hand side firm-specific variables are one year lagged differences. ∆y i,t-1, ∆PRIVi,t-1, and ∆GOVT LOAN /TOT BORRi,t-1 are instrumented. Instruments are lagged levels of the dependent and predetermined variables and differences of the strictly exogenous variables, up to a maximum of 3 lags. PRIV is % of private equity; sales is revenues received from main activity; profit is excess of income over all costs except tax, depreciation, and interest; average product of labor is the ratio of sales to employment; and returns to labor is the ratio of operating income to employment where operating income is sales net of input costs; government loans are the sum of the total amount of loans and subsidies from the government and government-owned development institutions, and total borrowing is the sum of loans from all sources. Standard errors are in parentheses.

∆SALESt

∆PROFITt

∆AVERAGE PRODUCTt

∆RETURNS TO LABORt

∆LABORt

∆PRIVi,t-1

.017**

(.008)

.038***

(.010)

.011*** (.004)

.003*** (.001)

.005

(.007) ∆y i,t-1

.488*** (.131)

-.044 (.119)

.043

(.336)

.612*** (.097)

.207

(.140) ∆GOVT LOAN /TOT BORRi,t-1

.076

(.102)

-.126 (.080)

.008

(.013)

.008

(.007)

.025

(.024) ∆ASSETS i,t-1

-.001

(.008)

-.005 (.005)

.001

(.001)

.001

(.001)

.001 (.007)

YEAR DUMMIES

Yes

Yes

Yes

Yes

Yes

Number of observations

1566

1556

951

946

962

Sargan Test a AR(1)b AR(2)c

.429

.004 ***

.280

.806

.245

.606

.275

.532

.219

.311

.006***

-.271

.495

.006***

.514

Notes: a: Null hypothesis of the Sargan test is that the over-identifying restrictions are valid. Test statistic is distributed as χ2(51). b: Null hypothesis of no first order autocorrelation in the differenced residuals (AB is still valid if differenced errors are AR(1)). Test statistic is distributed as standard normal. c: Null hypothesis of no second order autocorrelation in the differenced residuals (AB is not valid if differenced errors are AR(2)). Test statistic is distributed as standard normal. * Significant at the 10 per cent level, ** Significant at the 5 per cent level, *** Significant at the 1 per cent level.

Table 6 Listing and Equity Effect

Comparing Partially Privatized Firms to Fully State-Owned Firms (Fixed Effects) This table reports results from firm level fixed effects (within) regressions to control for the listing effect, with partially privatized firms as the treatment group and the population of state-owned firms that did not sell any equity as the control group for the period 1991-1998. All the firm specific variables are measured in logarithms except PRIV, FIRST, SECOND, returns to labor, and the share of government loans in total borrowing. We do not report the coefficients but all the regressions include government loans over total borrowing, log assets, and year dummies on the right hand side. The right hand side firm specific variables are lagged one year. FIRST is a dummy variable that equals one in the first year a firm sells equity and thereafter; SECOND is a dummy variable that equals one the second time a firm sells equity and thereafter; PRIV is % of private equity; sales is revenues received from main activity; profit is excess of income over all costs except tax, depreciation, and interest; average product of labor is the ratio of sales to employment; and returns to labor is the ratio of operating income to employment where operating income is sales net of input costs. Standard errors are in parentheses.

SALESt

PROFITt

AVERAGE PRODUCTt

RETURNS TO

LABORt PRIVi,t-1

.009* (.005)

.004

(.006)

.010***

(.003)

.007** (.003)

.004***

(.001)

.002***

(.001)

.006***

(.001)

.006***

(.001) FIRST i,t-1

.325*** (.101)

.311*** (.102)

.098* (.052)

.088** (.052)

.036***

(.014)

.032** (.014)

-.001 (.013)

-.001 (.013)

SECOND i,t-1

-

.184* (.104)

-

.118** (.053)

-

.050** (.014)

-

.001

(.014) Notes: * Significant at the 10 per cent level, ** Significant at the 5 per cent level, *** Significant at the 1 per cent level.

Table 7 Controlling for Changes in the Competitive Environment

Comparing Partially Privatized Firms to Fully State-Owned Firms (Fixed Effects and GMM) This table reports results from firm level fixed effects (within) regressions to control for the effects of two competition policies, with partially privatized firms as the treatment group and the population of state-owned firms that did not sell any equity as the control group for the period 1991-1998. All the firm specific variables are measured in logarithms except PRIV, DEREST, LIBT, returns to labor, and the share of government loans in total borrowing. We do not report the coefficients but all the regressions include government loans over total borrowing, log assets, and year dummies on the right hand side. The right hand side firm specific variables are lagged one year except for the competition dummies. DEREST is a dummy variable (interacted with a time trend) that equals one if the firm is in an industry that was reserved for state-owned firms and was opened to private entry in 1991; LIBT is a dummy variable that equals one if the firm is in an industry that removed restrictions on foreign entry in 1991; PRIV is % of private equity; sales is revenues received from main activity; profit is excess of income over all costs except tax, depreciation, and interest; average product of labor is the ratio of sales to employment; and returns to labor is the ratio of operating income to employment where operating income is sales net of input costs. Standard errors are in parentheses.

Fixed Effects Estimates

SALESt

PROFITt

AVERAGE PRODUCTt

RETURNS TO LABORt

LABORt

PRIVi,t-1

.018***

(.004)

.012***

(.002)

.005***

(.001)

.006***

(.0004)

.003

(.002) DERESTi,t

.048***

(.012)

.016***

(.006)

.003

(.002)

.001

(.002)

-.022***

(.007) LIBTi,t

-.033***

(.010)

.003

(.005)

-.001 (.001)

-.001 (.001)

-.025***

(.006)

Arellano and Bond Estimates ∆PRIVi,t-1

.013* (.008)

.037*** (.009)

. 011*** (.004)

.003***

(.001)

.005

(.007) ∆DERESTi,t

.016

(.019)

.010

(.010)

-.007*

(.004)

-.022*

(.001)

-.017*

(.011) ∆LIBTi,t

-.049*** (.020)

.003

(.009)

-.004 (.002)

-.001 (.001)

-.019 (.023)

Notes: * Significant at the 10 per cent level, ** Significant at the 5 per cent level, *** Significant at the 1 per cent level.

Table 8 The Impact of Private Ownership on Firm Performance

Comparing Partially Privatized Firms to Fully State-Owned Firms (Fixed Effects) Selected for Privatization as Control Group (Fixed Effects)

This table reports results from firm level fixed effects (within) regressions to control for potential dynamic selection using firms that are selected for privatization and sold equity in later years as the control group and partially privatized firms as the treatment group for the period 1991-1998. All the firm specific variables are measured in logarithms except PRIV, DEREST, LIBT, returns to labor, and the share of government loans in total borrowing. The right hand side firm specific variables are lagged one year except for the competition dummies. DEREST is a dummy variable (interacted with a time trend) that equals one if the firm is in an industry that was reserved for state-owned firms and has now been opened to private entry; LIBT is a dummy variable that equals one if the firm is in an industry that removed restrictions on foreign entry; PRIV is % of private equity; sales is revenues received from main activity; profit is excess of income over all costs except tax, depreciation, and interest; average product of labor is the ratio of sales to employment; and returns to labor is the ratio of operating income to employment where operating income is sales net of input costs. Standard errors are in parentheses.

SALESt

PROFITt

AVERAGE PRODUCTt

RETURNS TO

LABORt

LABORt

PRIVi,t-1

.017***

(.003)

.015***

(.003)

.013***

(.002)

.013

(.002)

.004***

(.001)

.005***

(.001)

.002***

(.0003)

.002***

(.0003)

.002**

(.001)

.003*** (.001)

GOVT LOAN /TOT BORRi,t-1

-.442***

(.141)

-.387*** (.146)

.019

(.082)

.003

(.085)

.019

(.035)

.015

(.035)

.016

(.014)

.011

(.015)

.085** (.033)

.035

(.030) ASSETS i,t-1

.005

(.020)

.007

(.020)

.012

(.012)

.009

(.012)

.009* (.005)

.009* (.005)

.004** (.002)

.004** (.002)

.003

(.005)

.001

(.004) DERESTi,t

-

.029* (.017)

-

-.007 (.011)

-

-.003 (.005)

-

-.003 (.002)

-

-.028***

(.024) LIBTi,t

-

.007

(.019)

-

.014

(.011)

-

-.006 (.005)

-

-.002 (.002)

-

-.005 (.004)

Year Dummies

Yes

Yes

Yes

Yes

Yes

R2

.3143

.3213

.2930

.2978

.2679

.2751

.2484

.2595

.0723

.2388

Number of Observations

325

323

290

290

292

Notes: * Significant at the 10 per cent level, ** Significant at the 5 per cent level, *** Significant at the 1 per cent level.

NOTE DI LAVORO DELLA FONDAZIONE ENI ENRICO MATTEI

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PRIV 77.2002 Christoph LÜLSFESMANN: Benevolent Government, Managerial Incentives, and the Virtues of Privatization PRIV 78.2002 Kate BISHOP, Igor FILATOTCHEV and Tomasz MICKIEWICZ: Endogenous Ownership Structure: Factors

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Evidence from the Fixed-Line Telecommunications Sector in Developing Economies PRIV 80.2002 Alberto R. PETRUCCI: Government Debt, Agent Heterogeneity and Wealth Displacement in a Small Open

Economy CLIM 81.2002 Timothy SWANSON and Robin MASON (lvi): The Impact of International Environmental Agreements: The Case

of the Montreal Protocol PRIV 82.2002 George R.G. CLARKE and Lixin Colin XU: Privatization, Competition and Corruption: How Characteristics of

Bribe Takers and Payers Affect Bribe Payments to Utilities PRIV 83.2002 Massimo FLORIO and Katiuscia MANZONI: The Abnormal Returns of UK Privatisations: From Underpricing

to Outperformance NRM 84.2002 Nelson LOURENÇO, Carlos RUSSO MACHADO, Maria do ROSÁRIO JORGE and Luís RODRIGUES: An

Integrated Approach to Understand Territory Dynamics. The Coastal Alentejo (Portugal) CLIM 85.2002 Peter ZAPFEL and Matti VAINIO (lv): Pathways to European Greenhouse Gas Emissions Trading History and

Misconceptions CLIM 86.2002 Pierre COURTOIS: Influence Processes in Climate Change Negotiations: Modelling the Rounds ETA 87.2002 Vito FRAGNELLI and Maria Erminia MARINA (lviii): Environmental Pollution Risk and Insurance ETA 88.2002 Laurent FRANCKX (lviii): Environmental Enforcement with Endogenous Ambient Monitoring ETA 89.2002 Timo GOESCHL and Timothy M. SWANSON (lviii): Lost Horizons. The noncooperative management of an

evolutionary biological system. ETA 90.2002 Hans KEIDING (lviii): Environmental Effects of Consumption: An Approach Using DEA and Cost Sharing ETA 91.2002 Wietze LISE (lviii): A Game Model of People’s Participation in Forest Management in Northern India CLIM 92.2002 Jens HORBACH: Structural Change and Environmental Kuznets Curves ETA 93.2002 Martin P. GROSSKOPF: Towards a More Appropriate Method for Determining the Optimal Scale of Production

Units VOL 94.2002 Scott BARRETT and Robert STAVINS: Increasing Participation and Compliance in International Climate Change

Agreements CLIM 95.2002 Banu BAYRAMOGLU LISE and Wietze LISE: Climate Change, Environmental NGOs and Public Awareness in

the Netherlands: Perceptions and Reality CLIM 96.2002 Matthieu GLACHANT: The Political Economy of Emission Tax Design in Environmental Policy KNOW 97.2002 Kenn ARIGA and Giorgio BRUNELLO: Are the More Educated Receiving More Training? Evidence from

Thailand ETA 98.2002 Gianfranco FORTE and Matteo MANERA: Forecasting Volatility in European Stock Markets with Non-linear

GARCH Models ETA 99.2002 Geoffrey HEAL: Bundling Biodiversity ETA 100.2002 Geoffrey HEAL, Brian WALKER, Simon LEVIN, Kenneth ARROW, Partha DASGUPTA, Gretchen DAILY, Paul

EHRLICH, Karl-Goran MALER, Nils KAUTSKY, Jane LUBCHENCO, Steve SCHNEIDER and David STARRETT: Genetic Diversity and Interdependent Crop Choices in Agriculture

ETA 101.2002 Geoffrey HEAL: Biodiversity and Globalization VOL 102.2002 Andreas LANGE: Heterogeneous International Agreements – If per capita emission levels matter ETA 103.2002 Pierre-André JOUVET and Walid OUESLATI: Tax Reform and Public Spending Trade-offs in an Endogenous

Growth Model with Environmental Externality ETA 104.2002 Anna BOTTASSO and Alessandro SEMBENELLI: Does Ownership Affect Firms’ Efficiency? Panel Data

Evidence on Italy PRIV 105.2002 Bernardo BORTOLOTTI, Frank DE JONG, Giovanna NICODANO and Ibolya SCHINDELE: Privatization and

Stock Market Liquidity ETA 106.2002 Haruo IMAI and Mayumi HORIE (lviii): Pre-Negotiation for an International Emission Reduction Game PRIV 107.2002 Sudeshna GHOSH BANERJEE and Michael C. MUNGER: Move to Markets? An Empirical Analysis of

Privatisation in Developing Countries PRIV 108.2002 Guillaume GIRMENS and Michel GUILLARD: Privatization and Investment: Crowding-Out Effect vs Financial

Diversification PRIV 109.2002 Alberto CHONG and Florencio LÓPEZ-DE-SILANES: Privatization and Labor Force Restructuring Around the

World PRIV 110.2002 Nandini GUPTA: Partial Privatization and Firm Performance

(xlii) This paper was presented at the International Workshop on "Climate Change and Mediterranean Coastal Systems: Regional Scenarios and Vulnerability Assessment" organised by the Fondazione Eni Enrico Mattei in co-operation with the Istituto Veneto di Scienze, Lettere ed Arti, Venice, December 9-10, 1999.

(xliii)This paper was presented at the International Workshop on “Voluntary Approaches, Competition and Competitiveness” organised by the Fondazione Eni Enrico Mattei within the research activities of the CAVA Network, Milan, May 25-26,2000.

(xliv) This paper was presented at the International Workshop on “Green National Accounting in Europe: Comparison of Methods and Experiences” organised by the Fondazione Eni Enrico Mattei within the Concerted Action of Environmental Valuation in Europe (EVE), Milan, March 4-7, 2000

(xlv) This paper was presented at the International Workshop on “New Ports and Urban and Regional Development. The Dynamics of Sustainability” organised by the Fondazione Eni Enrico Mattei, Venice, May 5-6, 2000.

(xlvi) This paper was presented at the Sixth Meeting of the Coalition Theory Network organised by the Fondazione Eni Enrico Mattei and the CORE, Université Catholique de Louvain, Louvain-la-Neuve, Belgium, January 26-27, 2001

(xlvii) This paper was presented at the RICAMARE Workshop “Socioeconomic Assessments of Climate Change in the Mediterranean: Impact, Adaptation and Mitigation Co-benefits”, organised by the Fondazione Eni Enrico Mattei, Milan, February 9-10, 2001

(xlviii) This paper was presented at the International Workshop “Trade and the Environment in the Perspective of the EU Enlargement ”, organised by the Fondazione Eni Enrico Mattei, Milan, May 17-18, 2001

(xlix) This paper was presented at the International Conference “Knowledge as an Economic Good”, organised by Fondazione Eni Enrico Mattei and The Beijer International Institute of Environmental Economics, Palermo, April 20-21, 2001

(l) This paper was presented at the Workshop “Growth, Environmental Policies and Sustainability” organised by the Fondazione Eni Enrico Mattei, Venice, June 1, 2001

(li) This paper was presented at the Fourth Toulouse Conference on Environment and Resource Economics on “Property Rights, Institutions and Management of Environmental and Natural Resources”, organised by Fondazione Eni Enrico Mattei, IDEI and INRA and sponsored by MATE, Toulouse, May 3-4, 2001

(lii) This paper was presented at the International Conference on “Economic Valuation of Environmental Goods”, organised by Fondazione Eni Enrico Mattei in cooperation with CORILA, Venice, May 11, 2001

(liii) This paper was circulated at the International Conference on “Climate Policy – Do We Need a New Approach?”, jointly organised by Fondazione Eni Enrico Mattei, Stanford University and Venice International University, Isola di San Servolo, Venice, September 6-8, 2001

(liv) This paper was presented at the Seventh Meeting of the Coalition Theory Network organised by the Fondazione Eni Enrico Mattei and the CORE, Université Catholique de Louvain, Venice, Italy, January 11-12, 2002

(lv) This paper was presented at the First Workshop of the Concerted Action on Tradable Emission Permits (CATEP) organised by the Fondazione Eni Enrico Mattei, Venice, Italy, December 3-4, 2001

(lvi) This paper was presented at the ESF EURESCO Conference on Environmental Policy in a Global Economy “The International Dimension of Environmental Policy”, organised with the collaboration of the Fondazione Eni Enrico Mattei , Acquafredda di Maratea, October 6-11, 2001

(lvii) This paper was presented at the First Workshop of “CFEWE – Carbon Flows between Eastern and Western Europe”, organised by the Fondazione Eni Enrico Mattei and Zentrum fur Europaische Integrationsforschung (ZEI), Milan, July 5-6, 2001

(lviii) This paper was presented at the Workshop on “Game Practice and the Environment”, jointly organised by Università del Piemonte Orientale and Fondazione Eni Enrico Mattei, Alessandria, April 12-13, 2002

2002 SERIES

CLIM Climate Change Modelling and Policy (Editor: Marzio Galeotti )

VOL Voluntary and International Agreements (Editor: Carlo Carraro)

SUST Sustainability Indicators and Environmental Evaluation (Editor: Carlo Carraro)

NRM Natural Resources Management (Editor: Carlo Giupponi)

KNOW Knowledge, Technology, Human Capital (Editor: Dino Pinelli)

MGMT Corporate Sustainable Management (Editor: Andrea Marsanich)

PRIV Privatisation, Regulation, Antitrust (Editor: Bernardo Bortolotti)

ETA Economic Theory and Applications (Editor: Carlo Carraro)